By Peter Kirkham
Sometimes you can save a little money on the front end with a variable rate home equity line of credit, but a fixed rate loan will be more predictable, and you'll always be able to budget for your loan payment every month because the minimum payment will be unchanging. There are several different reasons that people will take out a fixed rate home equity line of credit, so if you're thinking about doing any of these things, this is an option you might consider.
One traditional reason that people take out a line of credit on their home is for home improvements.
If you moved into your home several years ago and are ready to start laying new flooring, replacing kitchen appliances, or doing more major repairs and renovations like adding on or knocking out walls, a fixed rate home equity line of credit could be a good way to go. One way to be sure that this line of credit pays off is to insure that the improvements you're making will actually increase your home's value.
This way, you're taking out a line of credit against your home's current value, but you're making your home worth more, which actually raises the equity you have in it. Don't, however, improve your home for more than it would sell for in your neighborhood; even if you plan on staying in your home for a while, you'll still want it to be salable just in case, and you can't sell a house that's worth much more than those in the surrounding neighborhood.
To be sure that you aren't putting more money into your home than you'll get back out of it, check out the average prices of the homes in your neighborhood, and don't add a lot of features that your neighbor's homes don't have.
Another reason to take out a home equity line of credit is to make a major purchase. Maybe you want to take the vacation of a lifetime, or maybe you want to put a pool in the backyard. Either way, be sure that you're making a wise financial decision and that you'll be able to pay back the loan easily.
Also, see what you'll end up paying once the interest rate is added in. You don't want to end up paying $15,000 for your $10,000 vacation when you could have saved up for part of it in the first place!
One final reason that some people use a fixed rate home equity line of credit is to consolidate existing debts.
While a line of credit isn't the exact same thing as a home equity loan, it can be used in much the same way. You'll use the credit you get because of your home's equity to pay off higher-interest debts like credit cards and cars. Then you'll be left paying off the line of credit on your home, which probably lowers your monthly payments and certainly lowers your interest rates.
This can be a helpful financial move if you're in a lot of credit card debt.
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